Standard & Poor's Ratings Services (S&P) has taken various actions on the outlooks of systematically important U.S. banks. The particular 8 banks include JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corporation (BAC - Analyst Report), Citigroup, Inc. (C - Analyst Report), The Goldman Sachs Group, Inc. (GS - Analyst Report), Morgan Stanley (MS - Analyst Report), The Bank of New York Mellon Corporation (BK - Analyst Report), State Street Corporation (STT - Analyst Report) and Wells Fargo & Company (WFC - Analyst Report).
S&P is reassessing the insertion of sovereign support while providing ratings to the aforementioned bank holding companies. Notably, the rating agency downgraded the outlook on non-operating holding company (NOHC) of JPMorgan to ‘Negative’ from ‘Stable’. However, its outlook for the other 7 NOHCs has been reiterated at ‘Negative’.
The outlooks reflect the possibility of S&P not incorporating unusual sovereign support in the ratings of NOHCs, given the continuous changes in the regulatory perception of providing support. Additionally, this was the primary reason for a change in the outlook for NOHC of JPMorgan.
Additionally, S&P reaffirmed the outlook on JPMorgan’s operating subsidiaries at ‘Stable’. Further, the outlook for operating companies of BNY Mellon, State Street and Wells Fargo have been revised from ‘Negative’ to ‘Stable’, driven by the ratings upgrade of long-term sovereign credit rating on the U.S. to ‘Stable’. S&P believes that in case of any future financial crisis, government support will continue for the core and important operating subsidiaries of systematically important companies.
However, S&P maintained the outlook for the operating subsidiaries of BofA, Citigroup, Goldman and Morgan Stanley at ‘Negative’. This was based on company-specific factors.
Further, S&P affirmed its Issuer Credit Ratings (ICRs) on all 8 banks. However, the rating agency will likely lower the ratings on these banks if there is a greater chance of regulators not providing sovereign support in case of bankruptcy. Notably, in the case of a contagious fall-out, there is a higher chance of government support.
The news of the rating and outlook affirmation by S&P offers relief to the banks. For banks already facing higher funding costs and operating expenses, this reiteration will be a catalyst.
Further, this will boost investors’ confidence in the overall financial sector. In May 2013, Fitch Ratings had reiterated the long and short-term Issuer Default Rating (IDR) of 12 Global Trading and Universal Banks.
The ratings might also help financial institutions to tackle better another economic crisis. Notably, this could ultimately result in less involvement of taxpayers’ money in the bailout of troubled financial institutions.